A Strong 3Q For China, But No Tightening Yet

China reported rapid GDP growth of 8.9% in the third quarter, adding to signs that the nation’s recovery is gaining strength . Does that mean China needs to adjust its stimulus policies? Economists weigh in:

• The National Bureau of Statistics has just announced growth was 8.9% — still very strong, but not so strong that Beijing will begin to tighten. …I continue to expect no tightening, at least through mid-2010. China has begun, however, to implement its ‘exit strategy,’ which is a gradual reduction in the level of stimulus (credit and infrastructure spending) in response to rising private investment and consumption. – Andy Rothman, CLSA

• China’s recovery is impressive but remains heavily reliant on government-directed investment funded by aggressive bank lending – the economy has taken off, but is flying on one engine. To sustain strong growth through 2010 we will need to see a more broad-based recovery and until evidence of this emerges, Beijing is likely to keep policy accommodative. There remains little sign of a significant pick-up in domestic consumption, but external demand should provide more support, with recent data showing signs that the outlook for exports is improving. This should provide scope for Beijing to start tightening policy from early 2010 while still keeping growth at relatively high levels.–- Brian Jackson, Royal Bank of Canada

• As the economic recovery further firmed, the policy stance will be further fine-tuned. The State Council just announced that the government will also manage inflation expectations well while keeping the economy growing relatively fast. However…the overall policy stance will remain unchanged until spring next year. At that time, [we will see] GDP growth above 10%, CPI and PPI inflation turn positive, and export growth return to positive territory. Real austerity measures will be introduced to control investment growth and credit expansion. But we are not there yet. -– Lu Ting, Merrill Lynch

• There is a traditional skew in China’s policy stance towards stronger growth. This means that the authorities tend to respond early to a downturn, as evident over the past year, but late to an upturn. There is now a risk that fiscal and monetary stimulus is left too loose for too long…The biggest challenge for the authorities is that the private sector has yet to fully recover. This makes it difficult to tighten early. It also funnels money into equity and housing rather than the real economy. The temptation will be to leave policy too loose, for too long, resulting in another asset price bubble. -– Ben Simpfendorfer, Royal Bank of Scotland

• As the recovery gains more momentum, concerns over growth are swiftly shifting to worries about policy tightening. However, we see no signs of an imminent tightening, despite a clear change in policy tone at the State Council meeting yesterday. … In our view, the government has a very good window of opportunity over the next few quarters to focus on the quality of economic growth, given that growth is no longer a concern while CPI inflation risk is still remote. Hence the State Council added “rebalancing the economy” to its policy focus, sandwiched between a focus on growth and on inflation. We expect no major tightening measures, such as rate hikes, until March 2010 at the earliest. -– Sun Mingchun, Nomura

• The suite of September expenditure data and the headline GDP figures were broadly in line with our thesis that China would “print” a slightly lower than true GDP number simply because China had nothing to gain from publishing a particularly strong number. …The number is sufficiently warm to enable China to comfortably meet its implicit 8% full year growth target. At the same time, the number is sufficiently cool to show that China is still struggling in a difficult global environment. … The number makes it very clear that Beijing is not ready to concede to the PBOC and CBRC concerns on excess liquidity and tighten policy, just yet. –- Glenn Maguire, Societe Generale

About Real Time Economics

Real Time Economics offers exclusive news, analysis and commentary on the U.S. and global economy, central bank policy and economics. Send news items, comments and questions to the editors and reporters below or email realtimeeconomics@wsj.com.